Exclusive: Centre may revive small hydropower scheme in Budget 2026 with 1.5 GW target

The Union Ministry of New and Renewable Energy (MNRE) is in the process of bringing back a small hydropower scheme that is expected to receive fresh allocation in the upcoming Union Budget 2026, according to two officials familiar with the matter.

An exclusive small hydropower policy was introduced in India in November 2009. The policy was revised in July 2014, offering a specific Central Financial Assistance (CFA) for projects, aimed to encourage private sector participation through incentives, but was discontinued in 2017.

The reasons for its discontinuation included budgetary constraints, significant project delays and a shift in government priorities toward cheaper and simpler solar and wind energy projects.

Installed wind energy capacity (MW)

Installed solar energy capacity (MW)

Installed small hydro energy capacity (MW)

Right now, there is no central scheme to support new projects, the allotment of which are governed by state policies, since water resources is a state subject, according to the official ministry website.

The proposed programme may introduce a new central policy to revive SHP projects in hilly and border regions. It is expected to target around 1.5 gigawatts (GW) of capacity addition in the coming years and doubling India’s installed hydropower capacity to 10 GW over the next decade, according to the sources.

The Expenditure Finance Committee has cleared the proposal, according to the officials. But the programme is awaiting further approvals, including a nod from the Cabinet, making it eligible for consideration in the next budget cycle, they said.

“This is a scheme that was discontinued earlier, but the context has changed,” one of the senior government officials cited above told Down To Earth last month. “There is now greater emphasis on region-specific solutions and reliable renewable power in remote and border areas.”

In India, small hydropower projects — defined as plants with an installed capacity of up to 25 MW — are typically designed as run-of-the-river systems that do not require large dams or reservoirs. By harnessing the natural flow of streams and rivers, these projects have a comparatively lower ecological footprint and are considered well suited to hilly and mountainous regions where water gradients are steep.

One of the officials said the revival would involve an estimated Rs 2,500 crore in viability gap funding (VGF), with financial support covering 25-30 per cent of project costs. Each megawatt is expected to cost Rs 10-12 crore, with higher VGF support for projects located in hilly states, northeastern states and border districts. “The idea is to make projects viable in difficult terrain, where costs are higher and private investment is otherwise hesitant,” the official added.

The scheme is expected to focus on regions such as Arunachal Pradesh, Himachal Pradesh, Uttarakhand, Ladakh and other northeastern states. Officials said small hydropower offers relatively stable generation compared to solar, with plant load factors averaging 35–40 per cent and reaching up to 60 per cent in favourable locations. “That reliability is important, especially in areas where grid connectivity is weak,” one official said.

However, experts cautioned that small hydropower has long faced structural constraints. “Large hydro additions have remained limited because of long gestation periods, environmental clearances and water availability issues, and many of these challenges apply to small hydro as well,” said Arvind Poswal, programme officer at the renewable energy unit of the Centre for Science and Environment (CSE).

“Seasonal variability in water flows and issues related to diversion significantly increase timelines and costs, making such projects difficult to justify when compared with faster and cheaper solar and wind investments,” Poswal said. According to him, the timeline-related costs often undermine the economic case for small hydro relative to other renewables.

Poswal highlighted that while small hydropower does offer some strategic advantages, its role is inherently limited. “Small hydro can provide additional benefits, including potential use for pumped storage projects, but it cannot drive India’s energy targets the way solar and wind are currently doing. Its contribution will remain complementary and long-term,” he said.

This is reflected in national planning documents. Under the 12th Five-Year Plan (2012–2017), MNRE had targeted 7,000 MW of small hydro capacity, but progress lagged: Cumulative installed capacity stood at 3,803.68 MW as of March 2014, with only 408 MW added during the first two years of the plan. Although the annual target for 2014–15 was broadly met, overall deployment fell well short of plan expectations.

At the time, only about 19 per cent of identified potential — estimated at around 19,749 MW across 6,474 sites, later reassessed to over 21 GW — had been exploited. This gap between potential and deployment persists even today.

As of now, India has an installed small hydropower capacity of around 5 GW, accounting for roughly 1–1.5 per cent of total installed power capacity. Its contribution to electricity generation is even smaller — around 1 per cent or less of total annual output — reflecting its dispersed nature and dependence on seasonal river flows. While marginal in national terms, small hydro continues to play a niche role in supplying decentralised power in remote and hilly regions.

The renewed policy push is also linked to the growing relevance of pumped storage projects. In states such as Maharashtra and Odisha, small hydropower sites are increasingly being viewed as candidates for integration with pumped storage, particularly where existing reservoirs, irrigation dams or suitable elevation differences already exist. Such configurations allow surplus solar and wind power to be stored by pumping water uphill during off-peak hours and released during peak demand, improving grid flexibility without the need for large new dams.

“Small hydro’s relevance today is less about bulk generation and more about system support,” Poswal said. “In hilly regions, deploying solar and wind is also expensive and technically challenging, so hydro continues to be seen as a viable local option.”

There is also a strong state-level push behind the revival. States such as Uttarakhand view hydropower as a locally available resource that can deliver economic co-benefits beyond electricity, including employment and infrastructure development. States are deeply involved in project pipelines, with MNRE driving the small hydro programme at the Centre.

In recent Union Budgets, MNRE allocations have been skewed towards solar and wind, with flagship schemes such as PM-KUSUM, grid-connected solar parks, rooftop solar and transmission infrastructure accounting for most spending. Small hydropower, by contrast, has received limited budgetary support since 2017. “This is about correcting an imbalance,” another official said. “Not every region can be served efficiently by large solar or wind projects.”

MNRE has also indicated that some capacity could come online quickly. Of the 13 small hydropower projects identified earlier, 11 have been completed, and pending subsidies could be released once the scheme is formally approved. “There is low-hanging capacity that can be unlocked once the scheme is notified,” one official said.